Former Treasury secretary Ken Henry, who led a 2010 review of taxes, said the current system could be streamlined by imposing a blanket 25 per cent tax on all income from investments.
"I would like to see a complete overhaul of the taxation arrangements applying to capital income in all forms, interest, rent, dividends, capital gains, trust distributions," he told a parliamentary inquiry on Wednesday.
The federal government is mooted to be considering reducing the capital gains tax discount for investment properties, which could be announced in the May budget.
Senior Labor figures have been tight-lipped on the change in recent weeks, refusing to rule it out but instead pointing to already announced income tax changes as their priority.
The discount was introduced in 1999 by the Howard government, allowing for a 50 per cent reduction in the tax bill on the sale of investment properties if they were owned for at least a year.
Dr Henry said it was a fundamentally flawed measure because it failed to create incentives for investment and innovation.
"The 50 per cent discount on capital gains is the dumbest of all options to pursue that laudable policy objective," he said.
"It provides ... benefit to purely speculative investments in assets that generate nothing special by being in the hands of the investor rather than, say, an owner-occupier."
A Nordic-style tax system, in which income from investments was taxed at a flat rate, could be a better idea, Dr Henry said, urging the government not to grandfather any reforms for fear of making the tax system even more complex.
"I hate it," he said when asked whether a transition period was needed.
"(It causes) terrible distortions that put you on a bit of a slippery slope when it comes to policymaking."
Fellow economist Saul Eslake supported that view, warning grandfathering could risk exacerbating inequality.
"That privileges people, in essence, on the basis of when they were born or when they took particular decisions," he told the inquiry.
"But if grandfathering were necessary in order to get any changes at all to the (capital gains tax) regime, then I never want to let the perfect be the enemy of the good."
22°C